Is the Swedish krona really too strong?

Is the Swedish krona really too strong? Stefan Mellin Senior Analyst mell@danskebank.comk +46 8 568 805 92 5 November 2013 Important disclosures and certifications are contained from page 4 of this report. Investment Research www.danskebank.com/ci

Is the Swedish krona really too strong? Today, the Swedish newspaper Svenska Dagbladet published yet another article (in Swedish) on the theme the krona is too strong, which hurts the Swedish export industry and therefore the Riksbank should cut rates and Sweden should even consider joining the currency union. In our view, it is tiresome and uninformed. From a fundamental viewpoint it is hard to argue that the krona is too strong given, for example, (1) the significant current account surplus, (2) relative inflation developments, (3) real interest rates, (4) relative productivity gains and (5) solid public finances. These long-term factors suggest that the krona is fundamentally undervalued, which we have taken into account in our medium-term SEK forecasts. Taking inflation differentials into account suggests that EURSEK long-term equilibrium is in the neighbourhood of 8.30-8.40 (see next page ). While the krona may potentially still face some short-term headwinds, depending on how hard data in Sweden unfold in the coming weeks, we think current levels offer attractive SEK-buying opportunities for long-term players. Stefan Mellin, Senior Analyst, mell@danskebank.com, +46 8 568 805 92 2

The nominal effective exchange rate is 9% higher than the historical average since 1993. The inflation-adjusted effective exchange rate is 3% below the historical average, indicating that the SEK is undervalued. EURSEK is 3% higher than the historical average since 1993. The inflation-adjusted EURSEK rate is 2.6% above the historical average, indicating that the SEK is undervalued versus the EUR. EURSEK 12,0 11,0 10,0 9,0 8,0 Inflation-adjusted EURSEK Nominal EURSEK 94 96 98 00 02 04 06 08 10 12 12,0 11,0 10,0 9,0 8,0 Source: Macrobond, Danske Bank Markets Source: Reuters EcoWin, Danske Bank Markets Stefan Mellin, Senior Analyst, mell@danskebank.com, +46 8 568 805 92 3

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